What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-13 compared with 2026-05-14 · 321 added, 217 removed, 168 unchanged (76% of the section changed)

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following is management’s discussion and analysis of the major factors that influenced our financial condition and results of operations

as of and for the three months ended March 31, 2026.

This analysis should be read in conjunction with the audited consolidated financial statements as of December 31, 2025 and 2024 and for each of the two years

then ended, together with the related notes thereto, included in our Annual Report on Form 10-K

for the year ended December 31, 2025 (the “Form 10-K”) and with the unaudited condensed consolidated financial statements

and notes thereto set forth in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles

generally accepted in the United States of America (“GAAP”).

Some of the information contained in this discussion and analysis

includes forward-looking statements that involve risks and uncertainties.

You should review the sections titled “Note Regarding

Forward-Looking Statements” and “Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of forward-looking

statements and important factors that could cause actual results to differ materially from the results described in or implied by the

forward-looking statements contained in the following discussion and analysis.

All references to “we”, “us”,

“our”, and the “Company” refer to AIRO Group Holdings, Inc.

as of and for the three and six months ended June 30, 2026 and 2025.

This analysis should be read in conjunction with the audited consolidated

financial statements as of December 31, 2025 and 2024 and for each of the two years then ended, together with the related notes thereto,

included in our Annual Report on Form 10-K for the year ended December 31, 2025 (the “Form 10-K”) and with the unaudited

condensed consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q, which have been prepared

in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Some of the information

contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties.

You should review

the sections titled “Note Regarding Forward-Looking Statements” and “Risk Factors” in this Quarterly Report on

Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from

the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

All references

to “we”, “us”, “our”, and the “Company” refer to AIRO Group Holdings, Inc.

are a technologically differentiated aerospace, autonomy, and air mobility platform targeting 21 st century aerospace and defense

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leader in the industry.

business is organized into four operating segments, each of which represents a critical growth vector in the aerospace and defense market:

Drones, Avionics, Training, and Electric Air Mobility.

These four segments collectively target a combined total addressable market estimated

to be over $315.4 billion by 2030.

Our business is organized into four

operating segments, each of which represents a critical growth vector in the aerospace and defense market:

Avionics, Drones, Electric Air Mobility, and Training.

These four segments collectively target an estimated total addressable market of over $315

billion by 2030.

The Avionics segment

develops, manufactures, and sells avionics for military and general aviation aircraft, drones, and eVTOLs.

Our avionics products include

flight displays, Connected Panels, and GPS/GNSS sensors, all of which have been installed on legacy military aircraft and general aviation

We sell our avionics products through our Aspen Avionics brand, which is well-recognized in the general aviation aftermarket

sector with over 20 years of operating history and long-term customer loyalty for our value proposition.

We also serve as an avionics

supplier for OEMs, including Robinson Helicopters, Pilatus, Honeywell, and Joby Aviation.

We believe our avionics solutions have a considerable

market opportunity as general aviation fleets continue to age, with owners and operators seeking to upgrade the avionics technology on

their aircraft.

During the second quarter of 2026, our consolidated Phoenix manufacturing facility achieved AS9100D certification, reinforcing

our manufacturing quality and supporting future growth across general aviation and advanced aerospace markets.

The Drones segment develops, manufactures, and sells drones and will provide drone services, such as DaaS, for military and commercial

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for both military and commercial end markets.

The segment’s portfolio includes the RQ-35 platform and the recently introduced next-generation RQ-70 ISR platform,

which is designed to support expanded operational capabilities, including longer flight range, higher payload capacity, upgraded sensor

options, and enhanced autonomous mission operations.

The Avionics segment develops, manufactures, and sells avionics for military and general aviation aircraft, drones, and eVTOLs.

products include flight displays, Connected Panels, and GPS/GNSS sensors, all of which have been installed on legacy military aircraft

and general aviation platforms.

We sell our avionics products through our Aspen Avionics brand, which is well-recognized in the general

aviation aftermarket sector with over 20 years of operating history and long-term customer loyalty for our value proposition.

serve as an avionics supplier for OEMs, including Robinson Helicopters, Pilatus, Honeywell, and Joby Aviation.

We believe our avionics

solutions have a considerable market opportunity as general aviation fleets continue to age, with owners and operators seeking to upgrade

the avionics technology on their aircraft.

Training segment currently provides military pilot training.

The segment’s portfolio includes the battle-proven RQ-35 platform and the recently

introduced next-generation RQ-70 platform, which is designed to support expanded operational capabilities, including longer flight

range, greater endurance, higher payload capacity, upgraded sensor options, and enhanced autonomous mission operations.

During the second

quarter of 2026, we completed significant customer deliveries of our RQ-35 platform, including the first operational deployment featuring

our proprietary Zentra camera suite, and announced that the RQ-35 had been added to the U.S.

Department of War (“DoW”) Blue

UAS list, expanding its eligibility for U.S.

government procurement.

Electric Air Mobility.

Air Mobility segment, operated through our Jaunt brand, is developing dual-use electric and hybrid-electric compound rotorcraft aircraft.

Our near-term focus is on cargo-configured and multi-role autonomous aircraft platforms, including the JC250 and JX250 variants, designed

to support middle-mile logistics, tactical resupply, emergency medical delivery, law enforcement, ISR, and other commercial and government

The JC250 is designed as an autonomous cargo drone platform for logistics missions, while the JX250 is designed as a variant

platform for ISR and logistics applications.

These platforms are being designed to support extended operational range, payload flexibility,

and autonomous mission capabilities for commercial and government use cases.

We plan to pursue certification of our aircraft under existing

CAR 529 Transport Category Rotorcraft standards.

Our aircraft integrate characteristics of both rotary- and fixed-wing platforms through

our patented compound rotorcraft configuration, which has accumulated over 300 piloted flight hours across multiple Jaunt demonstrator

We are evaluating both fully electric and hybrid-electric propulsion architectures to support varying mission requirements,

including extended range and increased operational flexibility.

We believe this compound rotorcraft architecture, combined with electric

and hybrid-electric propulsion strategies, provides favorable range, payload capacity, and mission adaptability relative to conventional

rotorcraft and certain eVTOL configurations.

Upon certification, we expect our cargo-configured aircraft to serve as the initial foundation

of our commercialization efforts.

The Training segment currently provides military pilot training.

We offer professional training and consulting services to the U.S.

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These offerings include adversary air, close

air support, ISR, aircraft leasing, pilot training, ground liaison

services, and Joint Terminal Attack Controller training, as well as full joint theatre ISR and simulated ground strike training.

work closely with special military forces such as SEAL teams, the U.S.

Naval Air Warfare Center, and United States Air Force Air

Combat Command, and are a mandated recipient on a $5.7 billion DoW Indefinite Delivery Indefinite Quantity (“IDIQ”)

Contract and a $1.9 million IDIQ Contract.

Our personnel’s top security clearances and established relationships at the

Pentagon provide us with a differentiated ability to bid on mandates.

The Company is evaluating the strategic fit and long-term role of its Training segment.

The Training segment remains a valuable asset with significant long-term opportunity, but the segment is capital-intensive and often requires

meaningful ongoing investment.

Air Mobility .

The Electric Air Mobility segment, operated through our Jaunt brand, is developing dual-use electric and

hybrid-electric compound rotorcraft aircraft.

Our near-term focus is on

cargo-configured and multi-role autonomous aircraft platforms, including the JC250 and JX250 variants, designed to support

middle-mile logistics, tactical resupply, emergency medical delivery, law enforcement, ISR, and other commercial and government

The JC250 is designed as an autonomous cargo drone platform for logistics missions, while the JX250 is designed as a

variant platform for ISR and logistics applications.

These platforms are being designed to support extended operational range,

payload flexibility, and autonomous mission capabilities for commercial and government use cases.

We plan to pursue certification of our aircraft under

existing CAR 529 Transport Category Rotorcraft standards.

Our aircraft integrate characteristics of both rotary- and fixed-wing

platforms through our patented compound rotorcraft configuration, which has accumulated over 300 piloted flight hours across

multiple Jaunt demonstrator aircraft.

We are evaluating both fully electric and hybrid-electric propulsion architectures to support

varying mission requirements, including extended range and increased operational flexibility.

We believe this compound rotorcraft

architecture, combined with electric and hybrid-electric propulsion strategies, provides favorable range, payload capacity, and

mission adaptability relative to conventional rotorcraft and certain eVTOL configurations.

Upon certification, we expect our

cargo-configured aircraft to serve as the initial foundation of our commercialization efforts.

air support, ISR, aircraft leasing, pilot training, ground liaison services, and Joint Terminal Attack Controller training, as well as

full joint theatre ISR and simulated ground strike training.

We work closely with special military forces such as SEAL teams, the U.S.

Naval Air Warfare Center, and United States Air Force Air Combat Command, and are a mandated recipient on a $5.7 billion DoW Indefinite

Delivery Indefinite Quantity (“IDIQ”) Contract and a $1.9 million IDIQ Contract.

Our personnel’s top security clearances

and established relationships at the Pentagon provide us with a differentiated ability to bid on mandates.

The Company is evaluating

the strategic fit and long-term role of its Training segment.

The Training segment remains a valuable asset with significant long-term

opportunity, although the segment is capital-intensive and often requires meaningful ongoing investment.

Factors Affecting Our Performance

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certain end customers with such concentration primarily attributable to our Drones segment.

Training Segment Contract Opportunities

The Training segment has experienced delays in the

timing of expected contract awards, resulting in lower near-term revenue visibility.

During 2026, the Company invested in operational

capabilities to support its ability to compete for future contract opportunities.

Future operating results will depend on the timing and

successful conversion of contract awards.

of Long-Term Customer Commitments

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cause fluctuations in our operating results.

are dependent on a global supply chain and, in recent years, have experienced supply chain disruptions that resulted in delays and increased

costs which adversely affected our performance.

These disruptions impacted our ability to procure raw materials, microelectronics, and

certain commodities on a timely basis and/or at expected prices, and have been driven by supply chain constraints and macroeconomic conditions,

are dependent on a global supply chain and, in recent years, have experienced disruptions that resulted in delays and increased costs

which adversely affected our performance.

These disruptions impacted our ability to procure raw materials, microelectronics, and certain

commodities on a timely basis and/or at expected prices and have been driven by supply chain constraints and macroeconomic conditions,

including inflation and labor market shortages.

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This proactive

planning is an integral part of our normal operations and has allowed us to anticipate potential shortages and introduce redundancy along

planning is an integral part of our normal operations and has allowed us to anticipate potential shortages and introduce redundancy alongside

our supply chain.

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We have implemented actions and programs designed to mitigate

the impacts of supply chain disruptions, but anticipate that we and others in our industry will continue to face such challenges for

the foreseeable future.

The supply chain disruptions discussed above did not materially impact our outlook, business goals, results of

operations or capital resources during 2025 or the first three months of 2026.

the impacts of supply chain disruptions but anticipate that we and others in our industry will continue to face such challenges for the

foreseeable future.

The supply chain disruptions discussed above did not materially impact our outlook, business goals, results of operations

or capital resources during 2025 or the first six months of 2026.

operate in a complex and evolving global security environment, and our business is affected by geopolitical and security issues.

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Due to the nature of our government and commercial aerospace businesses, and their respective customer and supplier contracts, we are

not always able to offset cost increases by increasing our contract value or pricing, in particular on our fixed-price contracts.

material, component, and labor prices could subject us to losses in our fixed price contracts in the event of cost overruns.

higher interest rates have increased the cost of borrowing and tightened the availability of capital.

Among other things, these effects

can affect our ability to acquire equipment and constrain our customers’ purchasing power and decrease orders for our products

and services and impact the ability of our customers to make payments and of our suppliers to perform.

Moreover, volatility in interest

rates and financial markets can lead to economic uncertainty, an economic downturn or recession and impact the demand for our products

and services as well as our supply chain.

not always able to offset cost increases by increasing our contract value or pricing.

This can affect our ability to acquire equipment

and constrain our customers’ purchasing power, decrease orders for our products and services, and impact the ability of our customers

to make payments and of our suppliers to perform.

Moreover, volatility in interest rates and financial markets can lead to economic uncertainty,

an economic downturn or recession and create an impact on the demand for our products and services as well as our supply chain.

of the Electric Air Mobility Market

future revenue for our Electric Air Mobility segment will be tied to the continued development of autonomous cargo and logistics

operations and short distance aerial transportation.

While we believe the global market for electric air mobility will be large, it

remains undeveloped and there is no guarantee of future demand.

Our current focus is on the development and commercialization of

autonomous cargo and multi-role eVTOL platforms for logistics, ISR, defense, government, and related commercial applications.

anticipate receiving certification of our 33% downscaled cargo eVTOL under drone rules as early as 2027.

Our business will require

significant investment leading up to launching these services, including, but not limited to, final engineering designs, prototyping

and testing, manufacturing, software development, certification, operator training, infrastructure, and commercialization.

from supplier cost sharing, whereby our suppliers have agreed to defer their non-recurring engineering costs until

commercialization, which has reduced our initial funding requirements prior to commercialization.

future revenue for our Electric Air Mobility segment will be tied to the continued development of autonomous cargo and logistics operations

and short distance aerial transportation.

While we believe the global market for electric air mobility will be large, it remains undeveloped

and there is no guarantee of future demand.

Our current focus is on the development and commercialization of autonomous cargo and multi-role

eVTOL platforms for logistics, ISR, defense, government, and related commercial applications.

We anticipate receiving certification of

our 33% downscaled cargo eVTOL under drone rules as early as 2027.

Our business will require significant investment leading up to launching

these services, including, but not limited to, final engineering designs, prototyping and testing, manufacturing, software development,

certification, operator training, infrastructure, and commercialization.

We benefit from supplier cost sharing, whereby our suppliers

have agreed to defer their non-recurring engineering costs until commercialization, which has reduced our initial funding requirements

prior to commercialization.

Components of Results of Operations

consists primarily of product sales, fees for consulting services, licensing revenue, warranty sales, and after sale services.

consists primarily of product sales, fees for consulting services, licensing revenue, warranty sales, and after-sales services.

of our revenue is derived from the Drones segment.

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Income (Expense)

expense, net consists primarily of the interest expense from borrowings relating to third-party and related party notes, net of interest

Income (Expense), Net

income (expense), net consists primarily of the interest expense from borrowings, net of interest

income earned on cash deposits.

on Debt Extinguishment, Net

on debt extinguishment, net includes gains and losses on debt extinguishments.

Income (Expense), Net

income (expense), net includes changes in fair value on contingent consideration obligations and other liabilities, the impact from

debt and other liability settlements, and foreign currency exchange adjustments based on the terms of payments related to an earnout

Tax Benefit (Expense)

tax benefit (expense) primarily consists of income taxes in certain foreign jurisdictions in which we conduct business.

income (expense), net includes changes in fair value on contingent consideration obligations and other liabilities, the impact from debt

and other liability settlements, and foreign currency exchange adjustments based on the terms of payments related to an earnout obligation.

tax expense primarily consists of income taxes in certain foreign jurisdictions in which we conduct business.

Financial Measures

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and forecasting purposes.

define (1) EBITDA as net loss before interest (income) expense, income tax (benefit) expense, and depreciation and amortization, (2)

Adjusted EBITDA as net loss before interest (income) expense, income tax (benefit) expense, depreciation and amortization,

stock-based compensation, and contingent consideration fair value adjustments, and (3) Adjusted EBITDA margin as Adjusted EBITDA

divided by revenue.

The above items are excluded from our Adjusted EBITDA measure because these items are either non-cash in nature,

or because the amount and timing of these items is unpredictable, or because they are not driven by core results of operations,

thereby rendering comparisons with prior periods and competitors less meaningful.

We believe Adjusted EBITDA provides useful

information to investors and others in understanding and evaluating our results of operations, as well as provides a useful measure

for period-to-period comparisons of our business performance.

define (1) EBITDA as net (loss) income before interest (income) expense, income tax expense, and depreciation and amortization, (2)

Adjusted EBITDA as net (loss) income before interest (income) expense, income tax expense, depreciation and amortization, gain on

extinguishment of debt, stock-based compensation, strategic workforce transition costs, contingent consideration fair value

adjustments, warrant fair value adjustment, and IPO contingencies, and (3) Adjusted EBITDA margin as Adjusted EBITDA divided by

The above items are excluded from our Adjusted EBITDA measure because these items are either non-cash in nature, or because

the amount and timing of these items is unpredictable, or because they are not driven by core results of operations, thereby

rendering comparisons with prior periods and competitors less meaningful.

We believe Adjusted EBITDA provides useful information to

investors and others in understanding and evaluating our results of operations, as well as providing a useful measure for

period-to-period comparisons of our business performance.

Moreover, we have included Adjusted EBITDA in this Quarterly Report on

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these limitations are that our non-GAAP financial measures:

not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

depreciation and amortization expense, and although these are non-cash expenses, the assets being depreciated may have to be replaced

in the future, increasing our cash requirements;

not reflect provision for or benefit from income taxes that reduces cash available to us.

of these limitations, we consider, and you should consider, the non-GAAP financial measures alongside other financial performance measures,

including net income (loss) and our other GAAP results.

A reconciliation of EBITDA and Adjusted EBITDA to net income (loss), and Adjusted

EBITDA Margin to net income (loss) margin, the most directly comparable financial measures stated in accordance with GAAP, is provided

Investors are encouraged to review the related GAAP financial measures and the reconciliation of the non-GAAP financial measure

to their most directly comparable GAAP financial measure.

Three Months Ended March 31,

do not reflect our interest

expense, or the cash requirements necessary to service interest or principal payments, on our debt;

exclude depreciation and

amortization expense, and although these are non-cash expenses, the assets being depreciated may have to be replaced in the future,

increasing our cash requirements;

do not reflect provision for or benefit from income

taxes that reduces cash available to us.

of these limitations, we consider, and you should consider, the non-GAAP financial measures alongside other financial performance

measures, including net (loss) income and our other GAAP results.

A reconciliation of EBITDA and Adjusted EBITDA to net (loss)

income, and Adjusted EBITDA Margin to net (loss) income margin, the most directly comparable financial measures stated in accordance

with GAAP, is provided below.

Investors are encouraged to review the related GAAP financial measures and the reconciliation of the

non-GAAP financial measure to their most directly comparable GAAP financial measure.

Three Months Ended

Six Months Ended

(in thousands, except percentages)

June 30, 2026

June 30, 2025

June 30, 2026

June 30, 2025

Net (loss) income

Depreciation and amortization

Income tax (benefit) expense

Income tax expense

Interest (income) expense, net

Gain on extinguishment of debt

Stock-based compensation

Strategic workforce transition costs 1

Contingent consideration fair value adjustments

Warrant fair value adjustment

IPO contingencies 2

Adjusted EBITDA

Net loss margin

Net (loss) income margin

Adjusted EBITDA Margin

– Not meaningful

Strategic workforce transition costs consist of severance and other direct employee-related costs incurred

in connection with the Company’s strategic workforce realignment and organization optimization initiatives.

These costs are included in general and administrative expenses in the accompanying condensed consolidated statements

of operations.

Months Ended March 31, 2026 and 2025

following table shows our consolidated financial results for the three months ended March 31, 2026 and 2025:

months ended March 31,

IPO contingencies are made up of $1.0 million related to Kipps, $0.8 million related to the legal settlement, $0.5 million legal accrual,

$0.2 million for NGA, $0.3 million bonus, $0.6 million Aspen contingent debt, $0.1 million cash portion of the Aspen carve-out, net of

a $1.4 million gain on deferred compensation.

of Operations

and Six Months Ended June 30, 2026 and 2025

following table shows our consolidated financial results for the three and six months ended June 30, 2026 and 2025:

Three Months Ended

Period over period change

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Total operating expenses

Income (loss) from operations

Other income (expense):

Interest income (expense), net

Gain on extinguishment of debt

Other income, net

Total other income (expense)

Income before income tax expense

Income tax expense

Net (loss) income

Six Months Ended June 30,

Period over period change

(in thousands) except percentages

Cost of revenue

Operating expenses:

Research and development

Sales and marketing

General and administrative

Total operating expenses

Loss from operations

Other income (expense):

Interest income (expense)

Interest income (expense), net

Gain on extinguishment of debt

Other (expense) income, net

Total other income

Net loss before income tax benefit (expense)

Income tax benefit (expense)

the three months ended March 31, 2026 compared to the same period in 2025, revenue decreased by $2.9 million, driven by a $2.0

million decrease in the Drones segment, a $0.5 million decrease in the Avionics segment, and a $0.4 million decrease in the Training

The decrease in the Drones segment was primarily attributable to lower order volume during the period.

The decrease in the

Avionics segment reflects the impact of a facility relocation, with sales activity improving toward the end of the quarter.

decrease in the Training segment reflects lower sales during the period.

the three months ended March 31, 2026 compared to the same period in 2025, cost of revenue increased by $1.7 million, primarily due

to an increase of $1.9 million and $0.1 million within the Drones and Avionics segments, respectively, partially offset by a $0.4

million decrease in the Training segment.

Gross margin was 26.6% during the three months ended March 31, 2026 compared to 58.8%

during the same period in 2025.

The decline in gross margin was primarily driven by a 39.2% decrease in the Drones segment,

reflecting lower order volume, production timing, and an atypical sales mix during the quarter, with fewer new drone system sales

and a higher concentration of lower-margin upgrades, modifications, and support-related orders.

Gross margin in the Avionics segment

decreased by 21.5% due to a temporary disruption from a facility relocation and lower sales volume.

The Training segment margin also

decreased by 4.2% due to lower sales.

Total other income (expense)

(Loss) income before income tax expense

Income tax expense

Net (loss) income

the three months ended June 30, 2026 compared to the same period in 2025, revenue increased by $18.6 million, driven by a $19.0 million

increase in the Drones segment, partially offset by a $0.3 million decrease in the Training segment and a $0.1 million decrease in the

Avionics segment.

For the six months ended June 30, 2026 compared to the same period in 2025, revenue increased by $15.7 million, driven

by a $17.1 million increase in the Drones segment, partially offset by a $0.7 million decrease in the Training segment and a $0.6 million

decrease in the Avionics segment.

For both comparative periods, the increase in the Drones segment was primarily attributable to higher drone sales.

The decrease in the Training segment primarily reflects lower task orders.

The decrease in the Avionics segment

primarily reflects lower demand and temporary disruption associated with facility relocation that occurred during the first quarter of 2026.

the three months ended June 30, 2026 compared to the same period in 2025, cost of revenue increased by $6.0 million, primarily due

to an increase of $6.0 million within the Drones segment driven by higher drone sales.

Gross margin was 64.1% during the three months ended June 30, 2026

compared to 61.2% during the same period in 2025 commensurate with higher sales volume.

For the six months ended June 30, 2026 compared to the same period in 2025, cost

of revenue increased by $7.7 million, primarily due to an increase of $7.9 million and $0.1 million within the Drones and Avionics

segments, respectively, partially offset by a $0.4 million decrease in the Training segment commensurate with higher sales volume.

margin was 57.7% during the six months ended June 30, 2026 compared to 60.4% during the same period in 2025.

The decrease in gross

margin was primarily driven by a 4.2% decrease in the Drones segment, reflecting the impact of a less favorable sales mix during the

first quarter of 2026, partially offset by improved margins in the second quarter as drone product deliveries increased.

margin in the Avionics segment decreased by 15.6%, primarily reflecting lower customer demand and pricing concessions to support

Gross margin in the Training segment decreased by 10.9%, primarily reflecting lower sales.

and Development

the three months ended March 31, 2026 compared to the same period in 2025, R&D expense increased by $3.0 million primarily due

to a $2.3 million increase in the Drones segment, a $0.5 million increase in the Avionics segment, and a $0.3 million increase in

the Electric Air Mobility segment.

The increase in the Drones segment was primarily driven by higher personnel and consulting costs

related to ongoing strategic and development initiatives.

The increase in the Avionics segment reflects targeted investments within

the platform, while the increase in the Electric Air Mobility segment was primarily due to higher personnel costs supporting

development programs.

the three months ended June 30, 2026 compared to the same period in 2025, R&D expense increased by $3.5 million primarily due to

a $2.3 million increase in the Drones segment, a $0.7 million increase in the Electric Air Mobility segment, and a $0.4 million increase

in the Avionics segment.

the six months ended June 30, 2026 compared to the same period in 2025, R&D expense increased by $6.5 million primarily due to a

$4.6 million increase in the Drones segment, a $1.0 million increase in the Electric Air Mobility segment, and a $0.8 million increase

in the Avionics segment.

For both comparative periods, the increase in the Drones segment was primarily driven by higher personnel and consulting costs related to

ongoing strategic and development initiatives.

The increase in the Electric Air Mobility segment was primarily due to higher personnel

costs supporting development programs, while the increase in the Avionics segment reflects targeted investments within the platform.

and Marketing

the three months ended March 31, 2026 compared to the same period in 2025, sales and marketing expense increased by $0.5 million,

primarily due to higher personnel costs within the Drones segment.

the three months ended June 30, 2026 compared to the same period in 2025, sales and marketing expense increased by $0.6 million, primarily

due to higher personnel costs, higher facility costs driven by repair and maintenance activities, and increased marketing and tradeshow

For the six months ended June 30, 2026 compared to the same period in 2025, sales and marketing expense increased by $1.1 million,

primarily due to higher personnel costs, higher facility costs driven by repair and maintenance activities, and increased marketing and

tradeshow expenses.

and Administrative

the three months ended March 31, 2026 compared to the same period in 2025, general and administrative expense increased by $5.9

million, primarily driven by a $3.4 million increase in corporate expenses, including a $2.3 million increase in compensation

expense, a $0.3 million increase in insurance, a $0.4 million increase in professional fees, a $0.2 million increase in lease

expense, and a $0.2 million increase in other corporate overhead.

The remaining increase reflects higher expenses across our

operating segments, including a $1.8 million increase in the Drones segment, a $0.3 million increase in the Avionics segment, a $0.2

million increase in the Training segment, and a $0.1 million increase in the Electric Air Mobility segment.

The increase in the

Drones segment was primarily due to higher equity-based compensation, personnel, and operating costs, while the increases in the

Avionics, Training, and Electric Air Mobility segments were primarily attributable to higher personnel and operating

the three months ended March 31, 2026, net interest income was $0.4 million, compared to net interest expense of $1.3 million for the

three months ended March 31, 2025.

The 2025 amount included both cash and non-cash interest expense related to loan agreements with Libertas

the three months ended June 30, 2026 compared to the same period in 2025, general and administrative expense decreased by $12.8

million, including a $9.5 million decrease in the Training segment and a $1.7 million decrease in the Avionics segment, partially

offset by a $2.6 million increase in the Drones segment and a $0.4 million increase in the Electric Air Mobility segment.

decreases in the Training and Avionics segments were primarily attributable to lower stock-based compensation that vested with the

IPO, while the increases in the Drones and Electric Air Mobility segments were primarily due to higher stock-based compensation for

drones, and higher personnel and operating costs for both.

The remaining change was primarily driven by a $4.5 million decrease in

corporate expenses, including decreases in stock-based compensation, IPO-related expenses, and professional fees, partially offset

by increases in compensation expense, insurance and lease expense.

the six months ended June 30, 2026 compared to the same period in 2025, general and administrative expense decreased by $6.8

million, primarily reflects lower expenses across our operating segments, including a $9.2 million decrease in the Training segment

and a $1.4 million decrease in the Avionics segment, partially offset by a $4.4 million increase in the Drones segment, and a $0.5

million increase in the Electric Air Mobility segment.

The decreases in the Training and Avionics segments were primarily

attributable to lower stock-based compensation that vested with the IPO, while the increase in the Drones and Electric Air Mobility

segments were primarily due to higher stock-based compensation for drones, and higher personnel and operating costs for both.

The remaining

change is primarily driven by a $1.1 million decrease in corporate expenses, including decreases of $5.6 million in stock-based

compensation, $2.7 million in IPO-related expenses and $1.3 million in professional fees, partially offset by increases in

compensation expense of $6.5 million and $2.0 million in other expenses.

Income (Expense), Net

the three months ended June 30, 2026, net interest income was $0.2 million, compared to net interest expense of $8.0 million for the

three months ended June 30, 2025.

For the six months ended June 30, 2026, net interest income was $0.6 million, compared to net

interest expense of $9.3 million for the six months ended June 30, 2025.

The 2025 interest was primarily attributable to the

interest paid in shares on the investor notes which totaled $6.7 million and additional interest paid on borrowings with Libertas

Funding, LLC (“Libertas”) and WebBank.

on extinguishment of debt, net

the three and six months ended June 30, 2025, gain on debt extinguishment, net, was $15.6 million, primarily resulting from a $13.1

million gain on the partial settlement in equity of the Aspen bridge notes and a $5.7 million gain on the settlement of certain

investor notes at fair value, partially offset by losses on debt extinguishment of $3.2 million related to Libertas and

WebBank loans.

No gain or loss on debt extinguishment was recognized during the three and six months ended June 30, 2026.

Income (Expense), Net

the three months ended March 31, 2026, other expense was $0.3 million, compared to other income of $2.7 million for the three months

ended March 31, 2025.

The 2025 amount included a $1.8 million decrease in the fair value of the Company’s contingent

obligation originating from the Jaunt acquisition, and a $0.9 million decrease in the fair value of contingent promissory

notes with certain acquired companies, including Agile Defense, Coastal Defense, and AIRO Drone.

the three months ended March 31, 2026, our income tax benefit was $1.6 million as compared to $0.3 million of income tax expense for

the three months ended March 31, 2025.

The income tax benefit for 2026 was primarily attributable to a pre-tax loss at Sky-Watch, whereas

the 2025 tax expense was primarily attributable to pre-tax income.

the three months ended June 30, 2026, other income, net was $0.2 million, compared to other income, net of $20.1 million for the three months ended

June 30, 2025.

Other income for the 2025 period was primarily attributable to $17.5 million of income from fair value adjustments to

contingent consideration that was resolved in connection with the IPO and $1.8 million of income from

a fair value adjustment to the Libertas warrants, which were remeasured prior to becoming equity-classified upon the closing of the IPO.

These amounts were partially offset by $0.6 million of expense related to the Aspen contingent

debt, an obligation arising from the acquisition of Aspen Avionics that became payable in connection with the IPO.

the six months ended June 30, 2026, other expense, net was $0.1 million, compared to other income, net of $22.7 million for the six months ended

June 30, 2025, primarily attributable to $20.3 million of income from fair value adjustments to contingent consideration and $1.8 million of income from a fair value adjustment to the Libertas warrants, partially offset by $0.6 million

of expense related to the Aspen contingent debt, as discussed above.

the three months ended June 30, 2026 and 2025, income tax expense was $4.1 million and $2.1 million, respectively.

For the six months

ended June 30, 2026 and 2025, income tax expense was $2.4 million and $2.3 million, respectively.

Income tax expense for both periods

was primarily attributable to positive pre-tax income generated by Sky-Watch.

and Capital Resources

of March 31, 2026, we had cash and restricted cash of $54.4 million, of which $0.2 million was either restricted or was designated exclusively

for Sky-Watch operations, and working capital of $62.5 million.

on our current operating plan and available liquidity, management believes that the Company has sufficient cash and resources to

meet its obligations and continue its operations for at least the next 12 months from the date of issuance of the financial

statements included in this Quarterly Report on Form 10-Q.

of June 30, 2026, we had cash and restricted cash of $26.0 million, of which $0.2 million was either restricted or was designated exclusively

for Sky-Watch operations.

Working capital was $61.5 million.

In July 2026, we collected $43.2 million from the outstanding receivables

as of June 30, 2026 strengthening our liquidity position.

on our current operating plan and available liquidity, management believes that the Company has sufficient cash and resources to meet

its obligations and continue its operations for at least the next 12 months from the date of issuance of the financial statements included

in this Quarterly Report on Form 10-Q.

Incentive Agreement

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Dangroup in satisfaction of this agreement.

During the three months ended March 31, 2026 and 2025, the Company recorded $0.5 million

of expense within general and administrative expense related to the agreement.

In June 2026, the Dangroup Incentive Agreement was further amended.

In connection with the June 2026 amendment, the Company also agreed to pay Dangroup DKK 1.3

million, or $0.2 million with a foreign exchange rate as of June 30, 2026, on or before December 15, 2026.

The incentive bonus

related to fiscal year 2025 of $6.1 million was paid on June 10, 2026.

During the three months ended June 30, 2026 and 2025,

the Company recorded $2.6 million and $1.8 million, respectively, and $3.1 million and $2.3 million for the six months ended June 30,

2026 and 2025, respectively, of expenses within general and administrative expense related to

the agreement.

following summarizes our cash flows for the periods indicated:

Months Ended March 31,

Six Months Ended June 30,

(In Thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash (used in) provided by financing activities

Net cash provided by financing activities

Cash Used in Operating Activities

cash used in operating activities for the three months ended March 31, 2026 was $17.4 million, primarily due to a $15.5 million net loss

and a $11.1 million increase in inventory.

These uses were partially offset by non-cash expenses, including $3.1 million of depreciation

and amortization and $1.5 million of stock-based compensation, as well as working capital changes, including a $4.1 million decrease

in accounts receivable and a $5.1 million increase in accounts payable, accrued expenses and other long-term liabilities, partially offset

by a $2.1 million increase in prepaid expenses and other assets and a $2.1 million decrease in related party payables.

cash used in operations for the three months ended March 31, 2025 totaled $9.8 million, and was primarily due to a net loss of $2.0 million

and working capital adjustments, including an increase in prepaid expenses and other assets of $5.8 million and an increase in inventory

of $3.7 million, as well as a decrease in deferred revenue of $6.3 million and a decrease in accounts payable, accrued expenses and other

long-term liabilities of $1.7 million, partially offset by a decrease in accounts receivable of $8.2 million.

These were partially offset

by non-cash adjustments totaling $1.2 million, including depreciation and amortization of $3.1 million, change in fair value of contingent

consideration of $2.7 million, non-cash interest of $0.6 million, and stock-based compensation of $0.1 million.

cash used in operating activities for the six months ended June 30, 2026 was $48.7 million, primarily due to a $17.4 million net

loss, a $34.9 million increase in accounts receivable, a $6.5 million decrease in related party payables, and a $3.3 million

increase in inventory.

These uses were partially offset by non-cash expenses, including $6.8 million of depreciation and

amortization and $2.6 million of stock-based compensation, as well as working capital changes, including a $2.9 million increase in

deferred revenue and a $0.7 million decrease in prepaid expenses and other assets.

cash used in operating activities for the six months ended June 30, 2025 was $30.8 million, primarily due to working capital

changes, including a $12.6 million increase in accounts receivable and a $0.6 million increase in inventory, a

$9.4 million decrease in accounts payable, accrued expenses and other long-term liabilities, and a $7.2 million decrease in deferred

Operating cash flows were also impacted by non-cash gains, including a $20.3

million change in the fair value of contingent consideration, a $15.6 million gain on debt extinguishment, a $1.8 million change in

the fair value of warrant liability, and a $0.9 million gain on IPO transactions.

These uses were partially offset by $3.9 million

of net income and non-cash expenses, including $18.8 million of stock-based compensation, $6.7 million of non-cash investor note

interest, $6.2 million of depreciation and amortization, and $1.1 million of non-cash interest.

Cash Used in Investing Activities

of $2.1 million and $0.3 million was used in investing activities during the three months ended March 31, 2026 and 2025, respectively,

to purchase property and equipment and intangible assets.

Cash (Used in) Provided by Financing Activities

cash used in financing activities during the three months ended March 31, 2026 was $0.6 million due to repayments on third party borrowings

and related party borrowings.

Net cash provided by financing activities during the three months ended March 31, 2025 was $1.8 million

primarily due to $3.5 million of proceeds from the Libertas loans and $0.2 million of related party borrowings proceeds that were partially

offset by $1.7 million of debt repayments including $1.1 million to Libertas, $0.4 million to WebBank and $0.2 million to First Citizens

Community Bank.

of $4.5 million and $1.1 million was used in investing activities during the six months ended June 30, 2026 and 2025, respectively, to

purchase property and equipment and intangible assets.

Cash Provided by Financing Activities

cash provided by financing activities during the six months ended June 30, 2026 was $4.0 million, primarily due to a $5.5 million

increase in lines of credit related to Sky-Watch’s overdraft credit facility, partially offset by $1.3 million of repayments

on third-party borrowings and $0.2 million of repayments on related party borrowings.

Net cash provided by financing activities

during the six months ended June 30, 2025 was $49.6 million primarily due to $61.5 million of proceeds from the IPO net of issuance

costs, $8.5 million of proceeds from the Libertas and WebBank loans that were partially offset by $14.8 million of debt

repayments on borrowings and related borrowings, $3.3 million of contingent consideration payments, and $2.2 million in payments due

Accounting Policies and Estimates

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under different assumptions or conditions.

During the three months ended March 31, 2026, management believes there have been no significant

During the six months ended June 30, 2026, management believes there have been no significant

changes to the items that we disclosed within our critical accounting policies and estimates in “Management’s Discussion

and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31,

Recent Accounting Pronouncements

A summary of recent accounting pronouncements

that may have an impact on our consolidated financial statements is included in Note 1 to condensed consolidated financial statements

accompanying this Quarterly Report on Form 10-Q.

Accounting Pronouncements

summary of recent accounting pronouncements that may have an impact on our consolidated financial statements is included in Note 1 to

condensed consolidated financial statements accompanying this Quarterly Report on Form 10-Q.

Quantitative and Qualitative Disclosures About Market Risk

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis